FDIC Law, Regulations, Related Acts

4000 - Advisory Opinions

Relationship of State Usury Preemption Laws

FDIC-88-45

June 29, 1988

Douglas H. Jones, Deputy General Counsel

You have asked our opinion of the meaning of section 525 of the
Depository Institution Deregulation and Monetary Control Act of 1980
("DIDMCA"), 12 U.S.C. 1730g note, and its relationship with
section 521 of DIDMCA, 12 U.S.C. 1831d(a). Section 521 provides for a
preemption of state usury laws that apply to FDIC-insured
state-chartered banks.*
Section 521 preempts state usury laws in two ways. It gives insured
state banks the right to charge a federally-prescribed rate on loans.
It also says an insured state bank may "export" its home state's
interest rate-- i.e., that the bank may charge the highest
rate allowed in the State where the bank is located, no matter where
the borrower may be located.

Section 525 gives states the power to countermand the federal
preemption. This right of countermand, however, belongs to the state
where the loan is made. Specifically, section 525 reads as follows:

The amendment made by section 521 through 523 of this title
shall apply only with respect to loans made in any State
during the period beginning on April 1, 1980, and ending on the
date, on or after April 1, 1980, on which such State adopts
a law . . . which states explicitly and by its terms that such States
does not want the amendments made by such sections to apply with
respect to loans made in such State . . . . 12 U.S.C.
1730g note (emphasis added).

You have suggested that section 525 should be read to be congruent
with section 521-- i.e., that the state where the loan is
made must be the same, as a matter of law, as the state where the bank
is located. Accordingly, in your view, only a bank's home state has any
right to countermand the federal preemption with respect to loans made
by that bank. In support of your conclusion, you refer to a 1983 FDIC
staff opinion. (Letter to Peter D. Schellie, from Peter M. Kravitz,
dated October 20, 1983). This staff letter occasionally has been
misunderstood. As a consequence, I will attempt to clarify our
interpretation of section 525.

First, I am unable to agree with your interpretation of section 525.
Section 525 uses plain language. The language differs considerably from
that of section 521. There is nothing on the face of the statute to
indicate they are meant to say the same thing. Moreover, section 525
has its own legislative history, and its own peculiar purpose and
rationale. Congress had economic objectives in mind when it adopted
section 521; in particular , it was enacted in order to enable state
banks to compete with national banks. By contrast, Congress adopted
section 525 in an effort to preserve principles of federalism.
Recognizing that section 521 deprived states of authority over matters
traditionally committed to State control, Congress enacted section 525
in order to enable states to recover authority that section 521 had
taken away.

In my opinion, section 525 should be read in accordance with the
plain meaning of the language used. Escondido Mutual Water Co.
v. La Jolla Band of Mission Indians, 466 U.S. 765, 772
(1984). The state that has the right of countermand is the one in whcih
the loan is "made". This is not necessarily the state in which
the bank is located; nor is it necessarily the state in which the
borrower is located.

Section 525 is a federal statute. It must be interpreted as having a
single meaning throughout the nation. To do otherwise would be both
confusing and disruptive to the nation's banking system. Cf.
Marquette National Bank v. First of Omaha Service
Corporation, 439 U.S. 299, 312-313 (1978). Resort to individual
State statutory provisions in order to determine where a loan is made
does not provide a single federal standard and does not result in the
equity or the predictability I believe was intended when sections 521
and 525 were enacted. Instead, I believe an analysis of all the facts
surrounding a transaction must be used in determining where a loan is
"made". See Marquette, 439 U.S. at 311-312.

In summary, then, the right of countermand belongs to the state in
which a loan is made. The determination of where a loan is made should
be based upon an analysis of the facts surrounding the extension of
credit. The fact that a state has countermanded under section 525
should not affect the usury preemption of section 521 for a bank not
located in that state, so long as the loan is not made in the state
that has countermanded. And, since the determination of where a loan is
made is factual, such a countermanding state should not be able under
section 525 to legislatively extend its reach in order to affect the
determination.

You have stated that your client is an FDIC-insured bank chartered
in New York with a nationwide credit card business. New York has not
enacted legislation countermanding section 521's usury preemption. You
also have stated that: (i) your client assesses the final charges on
their credit cards in New York; (ii) payment is remitted to your client
in New York; (iii) the decision to extend credit is performed by your
client in New York; and (iv) your client issues its credit cards from
New York. Therefore, you suggest that if the home State of a bank is
not the automatic basis for determining where a loan is made, than a
factual examination under a traditional conflict-of-laws analysis also
supports a conclusion that loans (or extensions of credit) on credit
cards issued by your client are made in New York.

These are indeed very relevant factors in any analysis of where
loans are made. See e.g. RESTATEMENT (SECOND) OF CONFLICT OF
LAWS §§ 188, 195 (1971). Equally so is where the parties intend the
contract to be made under the contractual provisions itself. See
RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 187 (1971). The final
conclusions where a loan is made, however, is a factual one based upon
the terms of the contract and all the facts present. This office is not
in a position to analyze these or determine whether we have all the
facts in order to reach a conclusion. That is more appropriately the
role of bank counsel, who will be in a position to analyze the relevant
facts in light of the standards referred to above and so advise his
client.

* Section 522 (12 U.S.C. 1730g) and 523 (12 U.S.C. 1785g) of DIDMCA
contain provisions similar to those of section 521; but, they do not
apply to banks. Section 522 applies to institutions insured by the
Federal Savings and Loan Insurance Corporation and section 523 applies
to credit unions insured by the National Credit Union Administration. Go back to Text